The potential long-term effects of public spending on the economy

There are many channels through which public spending can affect the economy, for example through impacts on productivity and labour supply. We have explored a number of these channels in previous Fiscal risk and sustainability reports (FRSs) and as part of the medium-term forecasts and analysis in our Economic and fiscal outlooks (EFOs). These have included:

• Analysis of the implications of improved public health outcomes for the economy and public finances over the long term. Our ‘better health’ scenario in the 2024 FRS assessed the impact of lower chronic and work-limiting ill health, and improved life and healthy life expectancy, which could, for example, potentially be achieved through preventative health spending. By reducing public spending on both health care and welfare in the long term, and increasing tax revenues due to higher employment and earnings, this significantly reduced debt compared to our baseline scenario, as set out in paragraph 3.24. By 2073-74, improved public health outcomes in this scenario were projected to increase employment by around 1 million people, while around a further 1 million people already in work were projected to increase working hours.^a
• Assessing the economic and fiscal implications of spending on the net zero transition and damage from climate-related risks. The 2021 Fiscal risks report estimated the impact that early global policy action to reduce carbon emissions through public investment could have on the economy and public finances over the long term, compared to a delayed global policy action scenario.^b The 2025 FRS analysed the potential impact that additional public investment to deliver the net zero transition could have for productivity growth.^c Next year’s FRS will assess the costs and potential fiscal benefits of public investment in the means of adapting to climate change, such as flood defences and other infrastructure.
• Analysis of the potential long-run effect of increased overall public investment on the economy and public finances. In our 2024 discussion paper, we found that a sustained 1 per cent of GDP increase in public investment could plausibly increase the level of potential output by around 2.5 per cent at the 50-year horizon.^d The magnitude is sensitive to a number of factors, including the type of public investment, whether it crowds in or crowds out private sector investment, and the effectiveness of project delivery. These effects are included in our long-term modelling as we identify the public sector capital stock as contributing to productive capacity.
• The potential economic benefits of increased housing supply, delivered through either public social housing or private sector housing. The March 2025 EFO found that successful implementation of the Government’s planning reforms could increase potential output by 0.4 per cent by 2034-35, through various channels.^e
• The impact on labour supply of various welfare and other labour market policies in the March 2023 EFO. This included Department for Work and Pensions employment support programmes and the introduction of additional free childcare hours. We judged these and other labour market policies incorporated into that forecast would together increase labour supply by 110,000 by 2027-28.^f However, we have generally found that the scale of individual employment support programmes has been low, it has been difficult to judge whether they represent additional support relative to previous similar programmes, and several of them have not subsequently been delivered as originally planned.^g In contrast, the demand for childcare places has exceeded expectations, leading to upward revisions to planned spending.^h

We will continue to assess these interactions between public spending and the economy where this is relevant and material to our core remit of forecasting the medium-term public finances and assessing longer-term fiscal sustainability. In next year’s FRS, for example, we intend to examine the longer-term outlook for education spending in more depth. This will include assessing the channels through which educational outcomes and early-life circumstances can affect the economy and public finances over the long run.

Public services, such as education, health, and transport provide the foundation for long-term economic growth. However, economic evidence typically suggests that changes in macroeconomic performance resulting from changes in the scale or nature of public spending to take time to materialise, are highly uncertain, and depend on the effectiveness of public service delivery. For example, public spending on preventative health measures would typically have the greatest impact on health and labour market outcomes at older ages when chronic health conditions are most common.ⁱ And reforms to early year childcare and education will potentially impact the level of participation and skills in the adult workforce only gradually over subsequent decades.^j

More generally, spending policies typically affect ‘flows’ – for example the annual level of public investment or entrants into the workforce from employment support programmes. These flows are typically small relative to the total ‘stock’ of capital and labour, which drive overall economic performance. For example, the total government gross capital stock is around £1.5 trillion, while Government plans set out in Budget 2024 increased departmental capital spending at most by £24 billion in one single year of the forecast.^k The total workforce is around 37 million, while the largest individual new employment support programme we have reflected in our medium-term forecasts in recent years aimed to support an additional 15,000 people back into work. This means that while increases in, or reforms to, public spending may have very important medium-term impacts for specific groups of individuals or specific sectors, a material impact on the overall economy is often only seen over the long term.